ASK TOM Help! I’m due to buy an annuity but my fund’s value has fallen 35

Our expert responds to fears about the impact of market volatility on pensions

I’m planning to buy an annuity next year and have just found out my fund has fallen in value by 35%. I can’t believe it. How can this be possible?

Tom Selby, AJ Bell Head of Retirement Policy, says:

The ructions in bond markets in recent weeks have generated some pretty scary headlines along the lines of ‘pensions crisis’ and ‘pensions pandemonium’. This in turn, unsurprisingly, has resulted in lots of people panicking about their retirement pots.

The important thing to emphasise is that, for the vast majority of people, the issues facing the Bank of England will have an extremely limited impact.

If you’re in a defined benefit (DB) pension then the sponsoring employer has a legal duty to pay your promised pension. The only way this could change is if the sponsor went bust – and even then, the Pension Protection Fund (PPF) provides a valuable safety net.

If you have a defined contribution (DC) pension, such as a SIPP, your fund should be invested in a diverse mix of bonds and shares around the world. Alternatively, you may have paid a fund manager (or fund managers) to invest your portfolio on your behalf in return for a fee.

Either way, as long as your pension is diversified, what is happening to UK bonds shouldn’t have a material impact on your funds. What’s more, if you are invested you should be focused on the long term, rather than worrying about day-to-day stock market volatility.

And just to round things off, the state pension will not be affected.

The one type of fund that may have experienced a serious fall are annuity hedging funds. It is possible this is where your money is invested.

Annuity hedging funds usually shift your investments towards a mix of bonds and cash as you approach your chosen retirement date. The aim, as the name suggests, is to hedge your investments against annuity movements.

The theory is simple – annuity rates and bond prices move in opposite directions. So, while a big fall in the value of your portfolio might feel painful, if your annuity rate surges by a similar amount then you should broadly end up in the same position at retirement. This is exactly what we have seen recently in the UK.

This strategy is sound if you are planning to buy an annuity. However, there will inevitably be investors who set up a pension years ago, were placed in an annuity hedging fund (and therefore have a heavy bond exposure) and now no longer intend to buy an annuity.

These people will unfortunately be sat on heavy investment losses – although these losses will only be realised if you sell your investments. This is precisely why it’s so important to review your investments and make sure you understand and are comfortable with the risks you are taking.

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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